Thursday, August 7, 2008



An especially revelatory article appearing on page A3 of today’s (i.e., 8/7/08’s) Wall Street Journal outlined the results of an analysis prepared for the Journal by the FDIC. The major conclusion of the study was that 0.91% of the prime mortgages originated in the first quarter of 2007, well after problems in the mortgage market, or at least in the sub-prime market, were common knowledge, were “seriously delinquent,” i.e., either in foreclosure or at least 90 days past due within twelve months of origination. This was almost three times the 0.33% of prime mortgages originated in the first quarter of 2006 that were “seriously delinquent” with twelve months of origination. One can easily conclude that the problems in the mortgage market were not being addressed with any degree of alacrity, but the problem is worse than it appears.

The Journal notes that

“One piece of good news…is that loans originated in the fourth quarter of 2007 and early 2008 appear to be performing better.”

…but not as much better as one would have hoped. Quoted in the article is Frederick Cannon of Keefe Bruyette who says

“The more conservative lenders were scaling back in 2007, but the more aggressive lenders were expanding.”

This expansion in aggressive lending came about, as the article posits, because mortgage originators who could see that the last call was about to be announced bellied up to the bar and guzzled as much as they could before figurative closing time. (My terminology, not the article’s.) So we had a bunch of loans made with especially easy terms to get in just under the wire.

However, this last minute binge by aggressive lenders is only part of the problem. There should not be much comfort in knowing that “conservative” lenders were pulling in the reins as the mortgage problem became apparent. Why? Because loans that looked good, even in late 2007 and 2008, may turn out to be not so good after all because of the economic aftershocks of the earlier phases of the “mortgage crisis.” All those supposedly good loans are destined to underperform at rates far higher than could be predicted from history because of the condition of the economy courtesy of our economy’s finally having to deal with the dyspeptic consequences of our (at least) ten year credit binge.

Besides mortgages continuing to go bad at rates “no one could have predicted” (Just call the Pontificator Captain Nemo.), the “mortgage crisis” is not only a “mortgage crisis” by any means, as I have been arguing since at least early 2006 . We still have to contend with credit cards, commercial loans, car loans, etc.

The woods are only getting thicker.

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